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CoCo Bond Revival

11 August 2016 by Mark Holman

This week we have had two notable deals in the Additional Tier 1 (AT1) sector, and both from borrowers that have struggled in recent years.

Yesterday, Royal Bank of Scotland tapped the $ market with, what has been the largest $ AT1 to date, at $2.65bn. The bonds carried a hefty 8.625% coupon and are callable every 5 years. Clearly this is what helped the lead managers build a whopping book of $15bn of orders. Then today, Standard Chartered Bank announced details of their AT1 deal; again in $ and this time with a call in 2022 and an expected 7.5% coupon. The books, as I type, are already over $18bn as many are viewing Standard Chartered Bank as having the worst of their loan losses behind them.

Both are interesting credits in many ways, but both are not the easiest of banks to own, especially when it comes to the most risky sector within the financials universe. However, Royal Bank of Scotland has already rallied by over 1.5 pts, while Standard Chartered Bank is also over a point higher in the “grey” market.

It does feel as though investors are finally waking up to the fact that the AT1 sector has underperformed this year and that there is considerable relative value to be had; albeit in a high beta format. The whole sector has taken a fillip from this significant fresh demand and prices are rallying back to where they were at the start of the year. Given what the rest of the fixed income market has done in the last few months, there could be a long way to go yet.



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